Built to fail: how a HUD program is hurting its clients

There was a time, for a good month or so in September 2014, when Beverly Henry had no idea who owned her house.

“I turned to this woman and I said, ‘Wait, who owns my home?’” she said, recalling a conversation she had with a customer service representative at her lender, Bank of America. “And she said, ‘HUD does.’ And I said, ‘Oh!’”

In June 2014, the lender had, in fact, sold her mortgage to the Department of Housing and Urban Development in order to collect on federally guaranteed insurance for distressed mortgages.

It was already a shock for Henry to learn that a federal agency apparently owned the note to the tidy West Philadelphia rowhome she and her husband have lived in since 1977. But, as she later discovered, even that information wasn’t accurate. 

Henry knew something was afoot – her husband, Thomas, had been diagnosed with prostate cancer, and they’d fallen a few months behind on their monthly payments to Bank of America in 2011. She’d offered to pay back the delinquent sum – about $6,000 – in installments, but the bank said no. As far as she knew at the time, she was still negotiating with her bank to receive hardship status to lower their monthly payments and pay back the lump sum.

But HUD didn’t own her mortgage, either. The agency had almost immediately auctioned it off to RoundPoint Mortgage, a subsidiary of a subsidiary (you read that correctly) of Tavistock Group, an investment firm based in the Bahamas and owned by British billionaire Joe Lewis.

Unbeknownst to Henry, she had been quietly sucked into an obscure government auction program for distressed Federal Housing Administration loans. She was – and continues to be – stuck in bureaucratic limbo, along with some 6,000 other homeowners in Pennsylvania (and more than 102,000 nationally) who have seen their mortgages put on the auction block, often with little to no notification, by a poorly understood federal program.

Some have already lost their homes; many more could at any time. Henry will take her case to trial in May in an effort to fend off foreclosure, but 99 percent of homeowners in similar straits do not have legal representation, even though they are entitled to it. Virtually all of them are at the mercy of shadowy private equity companies that specialize in buying and profiting off of distressed financial assets.

“I think because properties are so hot in this neighborhood, they just want to get rid of us,” Henry told City & State. “This has been the most devastating experience I’ve ever been through in my life. And I’m 70 years old.”

While the Henrys struggle to save their home, HUD has come under increasing criticism for its handling of this and many other mortgages. Last year, U.S. Sen. Elizabeth Warren of Massachusetts rapped the agency over its mortgage sales, while Philadelphia, New York City and other areas have formed a coalition to drive local efforts aimed at combating a growing problem. Meanwhile, HUD auctioned off another round of homes on Sept. 14.

In June, the agency pledged reforms to stave off the looming mass foreclosures. But housing advocates say HUD has not gone far enough, nor – for the Henrys and thousands of other homeowners in desperate need of assistance – anywhere near
fast enough.

“HUD mostly seems to be good at putting out press releases and then talking about those press releases for three or four years,” said Geoffry Walsh, a staff attorney for the National Consumer Law Center.

In Philadelphia, hundreds of properties, often in black and Hispanic neighborhoods, have been sucked into asset sales and seized by third-party mortgage buyers through foreclosure proceedings. This obscure program now has visible, street-level consequences, according to local
political leaders.

“These are homeowners who are in vulnerable situations,” said Philadelphia City Councilwoman Helen Gym. “When we turn them over to private equity groups, we all suffer the consequences. They’re not developers; they’re profiteers. They’re there to make money, and they don’t mind sitting on properties, so you’re seeing increased abandonment in neighborhoods.”

The problem will probably get worse before it gets better. Pennsylvania is one of the real estate markets hit hardest by federal asset sales. Even more troubling is the paradox of the state’s existing protections for homeowners actually driving large banks to jettison even more risky assets through HUD auctions.

“We think the big servicers, like Bank of America, are trying to avoid state laws that include borrower protections … They’re trying to cherry-pick mortgages from states with laws they don’t like,” Walsh said. “Pennsylvania is one of those states.”

Beverly Henry's block in West Philadelphia (Source: Google Maps)
 

Part of the problem with the issue of distressed asset sales is complexity. In the most basic terms, the FHA offers insurance to private lenders as the cornerstone of long-running government inducement for big banks to offer mortgages to low- and moderate-income borrowers, like
the Henrys.

The idea is that if the owner ever defaults, lenders are protected because they can collect on insurance that the homebuyer contributes toward through their mortgage payments – $3,375 up front, followed by $91 a month, in the case of the Henrys. In theory, this collection can only happen after the bank offers certain FHA-mandated bailout options to homebuyers who qualify for relief.

The problem: that last part isn’t happening, according to Rachel Labush, an attorney with Community Legal Services of Philadelphia, who is representing the Henrys in court.

“Most of the time, FHA clients have some temporary hardship – say, they were unemployed for a few months, and called their mortgagor, who says, ‘We can't do anything for you,’” explained Labush. “But in that early stage of delinquency, they’re supposed to interview the client to discuss repayment options.”

Instead, if homeowners miss some mortgage payments, banks will speed toward cashing in on the insurance and dumping the distressed mortgages, making only token outreach efforts at best. Some homeowners, like the Henrys, are never notified that their homes are essentially headed to sale, and critics say the FHA does little to enforce its own
consumer protections.

Mortgages then get assigned to HUD to be sold through the Distressed Asset Stabilization Program, or DASP. A sort of a government clearinghouse for ailing, government-backed mortgages, DASP was initially conceived of as a way for the Fed to offload toxic assets that had gotten stuck in court or other internecine mediation processes for years after the housing crash.

“The main impetus for these DASP sales was that HUD was developing a cash shortage for its insurance funds because they had a big backlog of foreclosures,” Walsh said. “It was a way of cutting short the foreclosure process to get those claims paid … HUD was basically washing their hands of all these insurance claims.”

HUD began to auction off the mortgages – minus pesky consumer protections – to boutique financial firms to recoup some value and, at the same time, shifting responsibility for either righting the ship or foreclosing.

Advocates like Walsh say the program achieved that initial objective long ago and has now spiraled out of control, needlessly drawing homeowners with resolvable mortgage issues into a bureaucratic nightmare. What started as an effort to burn off the most tangled foreclosure cases has become an avenue for private banks dealing in FHA loans to wriggle out of bothersome legal responsibilities to
those borrowers.

“My view is that it was never the mediation programs that were slowing down foreclosures in the first place; it was mortgagees not participating effectively in the mediation process,” he insisted, referring to foot-dragging by big banks that were forced to honor FHA protections.

Homeowners who are pushed into the DASP program wind up with few protections. Many of the end buyers are offshoots of larger private equity firms, like hedge funds, often based in tax havens like Florida or the Bahamas. As secondary buyers, most aren’t interested in helping residents stay in their homes.

In short, small disruptions – say, a homeowner losing her job and missing a few mortgage payments – can quickly put residents on the verge of foreclosure. And that’s precisely what the FHA protections at the beginning of this process were designed to prevent.

“HUD should really just be looking at phasing the program out,” Walsh declared.

The Henrys’ problems began decades ago. They bought their house for $30,000 in the 1970s. Over the years, though, Beverly Henry refinanced her home several times when money got tight.

In March 2008, she took an FHA-insured refinancing deal from Security Atlantic Mortgage Co. that lowered her monthly interest rate but drastically increased the principal balance on her house. Eventually, her monthly payments began started spiraling out of control.

When her husband got sick and she started to miss payments in 2012, the couple owed a staggering $263,000 on the house – more than its current value – and was paying out nearly $1,800 a month, plus taxes and insurance, just to hang onto
the property.

“I thought refinancing would bring it down, but it didn’t,” she said. “There was a lot we should have educated ourselves about. I should have educated myself.”

Security Atlantic would eventually be sanctioned by HUD for its mortgage practices, but Henry was stuck haggling with Bank of America over roughly $6,000 in back payments – because she had an FHA-insured mortgage, she was entitled to certain hardship protections. The Henrys weren’t totally without means: both worked administrative jobs at the University of Pennsylvania, typically earning around $70,000 a year combined. She just wanted to lower her mortgage payments to around $800 a month. 

Yet every time she applied for mortgage relief, something would come up to prevent a resolution. The bank might say it hadn’t received her application, or that a form was filled out incorrectly, or that a medical note was too old to be valid. Bank representatives seemingly changed with the seasons, if anyone was available to talk to the Henrys at all.

Beverly Henry says she applied for the same hardship status eight separate times in two years, and submitted individual documents dozens of other times.

“I started walking to the Bank of America branch on Walnut Street to drop everything off just to make sure they got it. But they would still say they didn’t receive everything,” she recalled. “Then they made me come out to a branch in Cherry Hill to just scan everything. I didn’t hear back from them for months.”

In the end, none of it made a difference. By that time, Bank of America was already negotiating with HUD to collect the insurance money attached to the Henrys’ mortgage, presenting the couple as a lost cause.

Bank of America sent a single letter to the Henrys with a notice that their mortgage was being sold through the DASP program. The couple says they simply didn’t see the fine print, which Labush said was “buried” in the notification letter – part of the deluge of application rejection and delinquency notices they regularly received from Bank of America.

Labush says most of her DASP clients are like the Henrys: people who got in over their heads through refinancing deals at the height of the subprime mortgage crisis.

Over the years, as the shame and anxiety built along with the couple’s deteriorating situation, Henry says she kept everything a secret. She refused to talk to her coworkers and her close friends about her staggering bills. One day, she broke down and asked a lawyer friend for help. 

The friend balked at her situation but referred her to Community Legal Services and the Affordable Housing Centers of Pennsylvania. The Henrys started attending a foreclosure diversion program at City Hall through AHCP, crammed into a crowded courtroom with hundreds of people in similar situations and dozens of bank lawyers, Henry says.

Like most homeowners who enter into the city’s dwiversion program, Beverly and her husband went to court every month or so for a year and a half to stave off foreclosure. Despite these visits, her consultation with pro bono lawyers and the reams of letters and legal notices she’s amassed, Henry says her children and grandchildren still don’t know.

“That’s just how we are,” she explained. “It’s embarrassing. It’s degrading.”

A map of properties in Philadelphia affected by DASP sales (Source: Community Legal Services)
 

Part of the problem, again, is the complexity of mortgage arrangements – many homeowners may not even be fully aware of what forms of relief they are entitled to. On the other side of the equation, many mortgage companies owned by private equity firms are hardly enthusiastic when it comes to reminding homeowners about their options.

Homeowners do lose their homes to private equity firms, and some of these companies have amassed dozens of properties in Philadelphia alone. This leads to one of the biggest mysteries about DASP: What are companies like Bayview and Lone Star doing with all this real estate?

Housing advocates like Walsh say that they have not detected a singular pattern to investors’ use of the properties they acquire through DASP.

“My sense is that the basic business model is to look at these portfolios of nonperforming loans as mid-term investments that you want to hold onto and resell for as much profit as possible after, say, four or five years,” he said. “So, they’re looking to keep their options open for a five-year period.”

Sometimes, companies lock homeowners into five-year “repayment” programs, often designed to never actually pay down the principal of a mortgage, in order to to create the illusion that a loan is performing for resale purposes. Others are securitized and resold as new financial products. 

But in still other instances, it can be more profitable to simply aim for foreclosure to acquire and flip real estate, or chop housing into rental units.

“For some of them, they may just want to foreclose and realize a profit,” Walsh said. “It depends on things like fluctuations of property values or whether they can use them as large-scale rental holdings in some areas.”

RoundPoint Mortgage services hundreds of DASP mortgages in Philadelphia through shell companies with names like Newlands Asset Holding Trust or Queens Park Oval Asset Trust, all based out of the same anonymous North Carolina office building. Newlands, a company with no listed phone number, no website and a single publicly disclosed employee has accumulated 46 properties in Philadelphia through foreclosure proceedings.

It has flipped about 10 of those properties. In one instance, Newlands foreclosed on 3687 Belgrade Street, a newly built townhouse in a middle-class neighborhood of Philadelphia, for just $65,000 in February 2014, two months after it had picked up the mortgage at a DASP sale. Another two months later, having made no major improvements to the property, Newlands resold the same house for $175,000.

These are in the minority of properties, however. In the majority of cases, private equity firms appear to mainly sit on the properties they accumulate, sometimes for years. If DASP buyers are renting out their new assets while they wait for home values to appreciate, many do not appear to be doing so legally: Out of dozens of properties owned by Newlands analyzed by City & State, none had received a rental license.

City & State reached out to both HUD and RoundPoint for comment on multiple occasions, but received no reply from
either entity.

Philadelphia councilmember Gym said she believed this process is increasing the number of vacant and rental properties in urban neighborhoods, in addition to other stressors.

“When you have homeowners who are evicted or who lose their homes, that has dramatic consequences for a city like ours that already struggles with poverty,” she said. “We have affordable housing waitlists that take years and homeless shelters that are overcrowded. We can’t fix it all.”

It doesn’t have to be this way. Gym is part of Local Progress, a network of local elected officials that has pushed for reforms to programs like DASP. In June, HUD announced that it would make an effort to steer more distressed mortgages to nonprofit buyers, who would ideally be more forgiving towards impoverished homeowners. Nonprofit mortgage buyers, known as community development financial institutions, or CDFIs, were previously outbid on 98 percent of DASP sales.

HUD now separates out some mortgages for sale specifically to nonprofits. But Gym would like to see the program go further.

“That’s one of our biggest questions. Does it all have to go to private equity or could some go to CDFIs? Or the land bank?” she said, in a recent interview.

Gym had been a champion of the land bank, an arm of City Hall that acquires blighted property. She said she believes the agency could also function as a receiver for distressed mortgages, cribbing off a model implemented in New York City, where the municipality began bidding on DASP sales.

“It’s driven by our need to not increase our homelessness and eviction rates, and not lead to blight. Because we were seeing so much,” she said. “The consequences both to individuals and communities are dramatic – the Fed not being attentive to problems like this exacerbates our local situations.”

Changing the trajectory of DASP for future homeowners can seem like a daunting and risky proposition for cities like Philadelphia, but it could stave off years of misery and legal battles for homeowners who find themselves in situations similar to Beverly Henry’s.

Henry admits even she is overwhelmed by the intricacies of her own mortgage crisis at times, but says she is driven by a simple and understandable urge.

“We just don’t want to lose our home.” ■